The Week in Crayons

Although we pushed past last week’s highs on most of our broad market indexes, there seemed to be an undertone of negativity surrounding the markets this week as we continue to press higher despite the continued lack of any confirmation of continued quantitative easing by the Federal Reserve which for some reason remains the only plausible explanation that many “experts” on the twitter stream can see for the markets to push higher. We also witnessed yet another incidence of a high frequency trading algorithm run amok and possibly torpedo its maker, Knight Capital Group (KCG), raising concerns about the broken nature of the markets right now as many equities experienced highly volatile price behavior during the blow up demonstrating the lack of real liquidity in our markets right now and the potentially disruptive effect a high frequency trading algorithm can have on our markets. However, despite the very real concerns of the brokenness of the markets right now, or the negative outlook of the world economy, the market continues to behave positively and traders should leave all the macro issues to the media and focus on the immediate price action as that is the only thing that pays them.

Looking at a chart of the e-mini futures for the S&P 500, we can see the continued positive price action as we successfully retested last week’s breakout from a long term triangle by not only finding support at previous resistance, but by also breaching the highs from that breakout. This is a strong hint that price is ready to leave its previous range of consolidation and establish a new neighborhood. However, we are now at the top of our shorter term channel and for all intents and purposes remain in an environment characterized by neutral ranging action and should not chase price at this point. Notice the slight downtrend in momentum on the Stochastics indicator giving us a subtle hint that we are probably not going to explode out of this triangle.

Going into next week, some key price areas for traders to focus on are just above us around 1400 and just below 1420 as we come into very strong areas of resistance at our yearly highs from earlier in the year. These levels should act as magnets for price as they are critical areas that the bulls will want to push price action past. Below us, we should find initial support around the 1360 area which marks the top of the triangle pattern we appear to have completed if the market flounders next week, with more support coming at the 1335 area which marks the bottom of not only the longer term triangle, but our near term rising channel.

While price continues to move higher, it is doing so in short spurts as supply continues to overwhelm demand each time we probe into the range we failed from earlier in the year. Again, this is a major characteristic of corrective markets and traders should continue to play the edges of our range instead of chasing momentum. Also, while I mentioned earlier that most of our broad market indexes were behaving strongly, one notable exception recently had been the Russell 2000 Small Cap Index which has been much weaker than its peers. This is a strong sign that risk appetite is down as money has been flowing away from the small caps and into safer equities and another clue that we probably aren’t ready to blast off to new highs. The last couple of months have given us rather predictable price behavior as the markets have ranged up and down a very clear rising channel and traders should continue to watch these technical levels as we move forward in the next few weeks. As long as price remains in this channel, we can safely expect this range bound behavior to continue while a move out of this channel would signal a change in market character and the need to reevaluate it.

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